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Recency Bias Damages Returns

One of the more common and costly investing mistakes that individuals tend to make involves the behavior known as “recency,” which can be described as the bias toward overweighting recent events or trends, and ignoring long-term evidence.

Recency leads investors to buy after periods of strong performance (high) and sell after periods of poor performance (low). This behavior results in the opposite of what an investor should be doing (rebalancing) to maintain their portfolio’s asset allocation.

With that in mind, it shouldn’t come as much of a surprise that I’ve been getting a lot of questions lately from investors as well as advisors about the recent strength of the U.S. dollar and the poor performance of commodities. I thought it would be helpful to share some thoughts on these two subjects. We’ll begin by addressing the issue of currency risk.

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